By Damon Vis-Dunbar
23 April 2009
The members of an ICSID committee hearing an annulment request in Malaysian Historical Salvors v. the Government of Malaysia have come to starkly different conclusions on whether a foreign investment must contribute to the economic development of the host state in order to fall within the ambit of ICSID Convention.
Two out of three members of the ICSID committee—Judge Stephen M. Schwebel and Judge Peter Tomka —have annulled a 2007 award in which the sole arbitrator, Michael Hwang, declined jurisdiction.
Schwebel and Tomka conclude that Hwang “manifestly exceeded” his powers as arbitrator by failing to exercise jurisdiction that was granted under the ICSID Convention and the Malaysia-UK bilateral investment treaty.
In his jurisdictional award, Hwang concluded that Malaysian Historical Salvors’ investment in a marine salvage operation had not made a significant contribution to the Malaysian economy, and therefore fell outside the scope of the ICSID Convention.
That award garners strong support from a third committee member, Judge Mohamed Shahabuddeen, who asserts that the promotion of economic development is an essential hallmark of an investment under the ICSID Convention.
The diverging approaches of the committee members “marks a titanic struggle between ideas, and correspondingly between capital exporting countries and capital importing ones”, writes Shahabuddeen in his dissenting opinion.
Annulment committee divided on definition of an ICSID investment
Malaysian Historical Salvors (MHS), a marine salvage outfit owned by a British national, retrieved thousands of pieces of Chinese porcelain from the Straight of Malacca in the 1990’s. In its contract with Malaysia, the company was to receive a portion of the proceeds from the sale of the treasure; however, MHS maintains that it received a smaller cut of the profits than was promised under the contract.
Following an unsuccessful bid to recover damages through domestic courts in Malaysia, MHS turned to ICSID arbitration under the Malaysia-United Kingdom bilateral investment treaty.
However, the claim was disqualified after Hwang concluded that MHS had not made an “investment” as contemplated by the ICSID Convention.
Hwang’s jurisdictional award has been denounced by Schwebel and Tomka on several grounds.
First, the two committee members censure Hwang for not considering the Malaysia-UK BIT, which provides a broad definition of investment. Hwang had considered it unnecessary to apply the Malaysia-UK BIT, reasoning that the ICSID Convention formed the “outer-limits” of ICSID’s jurisdiction, and therefore the definition given to investment in the BIT would not alter his decision. However, according to Schwebel and Tomka, ignoring the BIT’s definition of investment undermines the importance of these treaties in granting jurisdiction to ICSID.
“To ignore or depreciate the importance of the jurisdiction they bestow upon ICSID, and rather to embroider upon questionable interpretations of the term ‘investment’ … risks crippling the institution,” write the two committee members.
Second, while Schwebel and Tomka acknowledge that Hwang is not alone among arbitrators in considering economic development as an important criteria for an ICSID investment, they maintain that he erred by elevating it to a jurisdictional condition.
Third, in concluding that an ICSID investment must make a significant contribution to economic development, the committee members say that Hwang failed to account for the fact that the drafters of the ICSID Convention purposely decided not to establish a monetary baseline for ICSID investments.
Dissenting opinion makes the case for development in ICSID investments
Shahabuddeen’s dissenting opinion offers a strong defense to the position that an investment must demonstrate a significant contribution to economic development if an ICSID tribunal is to hold jurisdiction.
This view is buttressed by the fact that ICSID operates under the auspices of the World Bank—an intergovernmental organization that offers financing to governments in an effort to alleviate poverty. Shahabuddeen also points to the Preamble of the ICSID Convention, which considers “the need for international cooperation for economic development, and the role of private international investment therein.”
According to Shahabuddeen, these facts lead to the conclusion that ICSID is not “meant to be just another arbitration institution”; rather, its overarching objective is economic development.
Shahabuddeen laments the tendency among tribunals to diminish the imporance of economic development as criteria of an ICSID investment, a trend he states “is not compatible with the original objectives of the institution.”
Indeed, that trend is highlighted in a jurisdictional award in Phoenix Action vs. the Czech Republic, rendered a day before the MHS annulment decision.
In the Phoenix Action award, the tribunal unanimously rejected the notion that a contribution to development should be criteria of an ICSID investment, on the view that “development of the host State is impossible to ascertain.”
In the words of the Phoenix Action tribunal:
“A less ambitious approach should therefore be adopted, centered on the contribution of an international investment to the economy of the host state, which is indeed normally inherent in the mere concept of investment as shaped by the elements of contribution/duration/risk, and should therefore in principle be presumed.”
The annulment decision and dissenting opinion, Malaysian Historical Salvors, SDN, BHD v. Malaysia, is available from the ICSID website at: http://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=viewCase&reqFrom=Home&caseId=C247
For further ITN reporting on the Malaysian Historical Salvors v. Malaysia, see “Underwater salvaging firm fails “investment” test in ICSID case against Malaysia,” By Damon Vis-Dunbar, 30 June 2007: http://www.IISD.org/pdf/2007/itn_june30_2007.pdf
For ITN reporting on Phoenix Action Ltd., v. The Czech Republic, see “Tribunal disqualifies ‘abusive’ claim by Phoenix Action against the Czech Republic,” By Damon Vis-Dunbar, 20 April 2009, http://www.investmenttreatynews.org/cms/news/archive/2009/04/20/tribunal-disqualifies-quot-abusive-quot-claim-by-phoenix-action-against-the-czech-republic.aspx